JP Morgan sees RIL at Rs 3170 in a year; upgrades stock to overweight

The brokerage firm cites a positive earnings revision cycle ahead, given the strong refining and gas environment, for the ratings upgrade.

JP Morgan has upgraded its stance on Reliance Industries Limited (RIL) to overweight from neutral and sees the stock at Rs 3,170 levels in a year – up 21 per cent from the current levels. RIL, according to the brokerage, is among the few large companies in India with a positive earnings revision cycle ahead, given the strong refining and gas environment.

"Our upgrade to overweight is driven by: a) global view of a strong refining environment though we build in a decline in product cracks from current levels; and, b) RIL's non-Energy business valuations continuing to hold up. The key risks include: a) fall in Refining margins to Jan 2022 levels; and, b) sharp decline in Consumer business valuations," wrote Pinakin Parekh, Parsley Rui Hua Ong and Sarfraz Bhimani of JP Morgan in a co-authored report.

JP Morgan's upgrade comes on the heels of another bullish stance by a foreign brokerage Morgan Stanley, which expects the RIL to clock an Ebitda (earnings before interest, taxes, depreciation and amortization) of $20 billion by 2022-end. The uptick in Ebitda, Morgan Stanley said, could help the Mukesh Ambani-controlled company improve its market capitalisation (market-cap) by $50 billion in the period. RIL's Ebitda came in at $16.6 billion up 29 per cent year-on-year (y-o-y) in fiscal 2021-22 (FY22), while net profit surged 26 per cent YoY to $8.8 billion, led by oil-to-chemicals (O2C), telecom and retail.

Meanwhile, RIL has gained nearly 11 per cent as compared to around 10 per cent fall in the S&P BSE Sensex thus far in calendar year 2022 (CY22). JP Morgan expects the stock's outperformance to continue driven by an improvement in earnings. The brokerage has increased its FY23-24 earnings per share (EPS) estimates by 19 per cent (to 125.68) and 17 per cent (to 132.76), respectively. RIL’s upstream business, their analysts said, should benefit from rising domestic gas prices and higher volumes.

"Our earnings estimates imply a sharp pullback in diesel and gasoline cracks from current record level, but RIL remains among the best positioned refiners globally, given: a) ability to buy and process arbitrage barrels; b) diesel heavy slate; and, c) export focus. While RIL's product hedging means there is unlikely to be a complete pass-through of spot cracks, overall we see the oil-to-chemical (O2C) business reporting improving profits for the next few quarters. While polyethylene (PE) spreads remain weak, strong paraxylene (PX) should result in steady petrochem profits," the brokerage said.

Another key reason for the upgrade, JP Morgan said, is the resilience shown by RIL's consumer and technology business (Jio, Retail), which the brokerage had expected to come under pressure amid the global tech selloff and negate the near-term earnings upside.

"RIL's consumer valuations have held up well and with likely higher average revenue per user (ARPU) and further ramp-up of retail footprint, combined with Renewables business optionality, the non-energy business valuations should hold up going forward even as consolidated reported earnings (and hence cash flows) should improve materially from here on Refining and engineering & procurement (E&P)," analysts at JP Morgan said.